What are Living Trusts?

Living trusts are trusts created while you are alive. These are different from testamentary trusts which are created via a trust or a will after you die. One of the advantages of a living trust over a testamentary trust is that living trusts avoid probate while testamentary trusts do not.

What is a Revocable Living Trust? The law defines a "trust" as an arrangement whereby property is transferred (from the settlor) with an intention that it be held and administered by the trustee for the benefit of another (the beneficiary(s)). The most common form of trust arrangement is the "Revocable Living Trust." This kind of trust can be amended in any way or fully revoked while you (and your spouse in some cases) are alive. By contrast, an irrevocable trust cannot be amended or terminated once it has been created.

Settlors, Trustees, and Beneficiaries - The person who creates a trust is generally called the trust "settlor". The person who legally holds and manages the trust property is the "trustee." The person for whose benefit the trust is created and managed is the "beneficiary." The settlor, trustee, and beneficiary can be the same person or persons, they can be different persons or even multiple charitable organizations.

Two Settlor and One-Settlor Trusts - Trusts can be created by multiple persons, for example couples (married or otherwise), or one person. However, there are certain advantages available to settlors that are married in a two settlor trust arrangement, i.e., benefit of the unlimited marital deduction and the creation of an A-B-C Trust (Survivor’s Trust "A", Bypass Trust "B" and Marital Trust "C") versus a single settlor trust or non-marital multiple settlor trust. Please consult with an EPT Tax and Legal Professional for further information regarding the different types of trusts and which trust instruments may be best for a particular Client.

Probate Avoidance - Properly implemented and funded Revocable living trusts are very useful in states where probate is a burdensome and costly process. By creating, implementing and funding a living trust you can avoid an unnecessary probate. At death, the trust is administered by the trust’s nominated and appointed successor trustee(s) and the trust assets are distributed (or held by the trustee) according to the settlor(s)instructions. Trust provisions need not become public during trust administration.

Trustees During Life - Generally, the settlor is the trustee (and beneficiary) of a revocable living trust during life. Thus, the settlor retains complete control over and ownership interest in the trust assets. Both spouses generally act together as co-trustees of a two settlor trust. When one spouse becomes incapacitated or dies, the remaining spouse can be the sole acting trustee.

Successor Trustees - When the settlor/trustee becomes incapacitated or dies, the successor trustee named in the trust instrument takes over holding and managing of the trust property without court supervision. The successor trustee(s) can be children or other relatives or friends who are responsible and in whom the settlor has confidence. The successor trustee can also be a bank, private professional fiduciary or professional trust company. These are also known as a "corporate trustee." If the successor trustee is also the beneficiary of the trust at the settlor's death, the successor trustee's only duty may be to distribute the property to him- or herself at that time.

Potentially Avoids a Costly Conservatorship - As mentioned above, should the settlor/trustee become incapable or unwilling to manage his or her assets during life, or becomes incapacitated, the successor trustee named in the trust instrument can take over holding and managing the trust assets without a court having to appoint a conservator.

Subtrusts - Parenting Beyond the Grave - After death, trust assets that could otherwise be paid outright to beneficiaries can continue to be held and administered in one or more irrevocable subtrusts according to the settlor(s) instructions set forth in the trust, for example, for minor or disabled children, the creation of a "special needs trust" to avoid having that beneficiary disqualified from receiving government benefits. The subtrust can remain in existence for the entire life of the beneficiary or terminate with the trust property being distributed outright to the beneficiary at a specified age. Holding property in trust for a minor or incapacitated beneficiary can avoid a court-appointed guardian or conservator for that beneficiary.

Trust Funding - If a living trust is used in an estate plan it is essential to "fund" it; that is to transfer assets into the trust during the life of the settlor. If this is not done the probate-avoidance advantages of a living trust may not be realized. The attorney who prepares your living trust will assist you in the funding process. Assets can be added to or taken out of trust at any time without having to amend the trust instrument. In some cases Estate Planning Attorneys have been successful in petitioning the court to have an asset left out of trust be ordered as part of settlor's trust estate and given the legal criteria for same being met. Should you have a question concerning this process, or have an immediate client need, please contact EPT for more information and prompt assistance.

EPT Living Trusts websites are available to Mortgage Lenders, Insurance agents, Securities Advisors, CPA's, Banks, Title Reps, Qualified Intermediary and Attorneys.

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